Banking and finance are essential sectors in a country and help stabilize the economy. Designing such a system is not easy and requires policymaking, governance, and financial expertise. When developing a financial banking system, the primary goal is to maintain a stable economy.
The reason is simple. Global and local markets are constantly changing. So, spending and buying patterns are not consistent. Therefore, each economy needs to implement a customized and adaptive financial system to ensure the economy remains stable when new trends emerge.
The problem is that despite the careful design process, most of our banking systems have failed. The global economy has suffered several crises in the past 50 years and often remains a few steps away from absolute disaster.
Who do we blame under such circumstances? People, policymakers, or the policy? We need to explore what a financial banking system is to answer these questions.
Financial Banking System
A financial banking system relies on fiscal and monetary policies implemented through a central bank. Major chartered banks and investment firms are also critical to this process because they help lay the base for policy implementation across the governance region.
Banks are an essential part of the system because they have been critical to all economic decisions for over a hundred years. Their lending and investment frameworks shape how the policies trickle down and affect citizens of all socioeconomic groups.
The Current System in Canada
The current system in Canada is one of the most stable worldwide; however, it has its faults. The Canadian system centres on the Bank of Canada, a publicly-owned bank. The bank is responsible for setting the federal interest rate, lending to the government, and managing chartered banks and financial markets.
The existing framework heavily relies on the interest rate, central to all borrowing, lending, and investment. A person or entity borrowing money from a bank will agree to pay the proposed interest on the principal amount.
This interest rate also varies depending on the economic situation in the country. It typically rises during inflation to offset the loss in borrowing power of money during the repayment timeline. In contrast, interest rates fall when the economy descends. The current interest rate is 6.8%, the highest in three decades.
The role of the central bank is to change the federal interest rates based on the country’s economic situation. Their proposed interest rate is meant to be the lowest, and chartered banks adjust their offerings accordingly to remain competitive and profitable.
Inefficiencies of the Banking System in Canada
Despite appearing stable, Canada’s current financial banking system is not as secure and growth-oriented. Here are some of how the current system fails to protect people and society as a whole:
1. Pushes for Consistent Consumption
The free-market model heavily influences the current financial and economic model. Although Canada, as a welfare state, does not follow capitalism as accurately as countries like the USA, it does base its operations on its principles.
As a result, the country often promotes consumerism over moderation, pushing spending to maintain economic stability. Unfortunately, consumerism has several disadvantages.
Firstly, this strategy places a heavier burden on people from lower socioeconomic groups. Wealthier citizens have higher disposable income; therefore, their spending does not affect their savings as much. In contrast, poorer people are left with fewer savings even after spending in moderation.
Secondly, the consistent spending model often becomes the primary reason for inflation. Wages rarely rise at the same level as product prices, leaving the lower socioeconomic groups struggling to make ends meet as interest rates and prices climb.
2. Promotes Materialism
The focus on consumerism typically also promotes materialism. Materialism pushes people to seek comfort in material possessions and belongings, driving them further from community connections. The more materialistic society becomes, the easier it is for people to suffer from mental health concerns, especially since one section is much better off.
In neoclassical economics, a happy person consumes more, which is not unlike a person expending all his forces and then destroying them. However, economic ethics questions whether human beings were created for such a purpose.
This question opens the debate on whether religious teachings disseminated in the economy and constitute economic ethics can modify the disposition of society and reduce the detrimental effects of economic activities and whether they can manage materialism and financial balance (Bidabad & Sherafati, 2016).
Additionally, people often take loans to buy items they don’t necessarily need and put themselves in unnecessary debt. This action further adds to their concerns, especially if they face financial difficulties and cannot continue making loan payments.
3. Contributes to Socioeconomic Disparity
Capitalism was meant to promote innovation and equality through trickle-down economics. However, it has yet to achieve its goals. Following an interest rate-driven economy often furthers the gap between the rich and poor.
Wealthy people are less likely to default on loans and have a better credit rating than their poorer counterparts. Furthermore, they can also follow a shorter loan repayment timeline, reducing the overall interest rate they have to pay back.
In contrast, less prosperous households can often only afford the lowest payment terms, thus settling for higher overall cos per dollar borrowed.
The abovementioned concerns are routine and shape the general buying and spending behaviour in the economy. But, they aren’t the only problems. The reliance on an interest-based financial banking system was the core reason for the 2008 economic collapse. A weak model and political lobbying for relaxed regulations distorted the market, leading to losses worth more than $2 trillion.
Alternate Financial Banking System
The earlier discussion clarifies that there is scope for an alternate banking system to exist in Canada. This alternative needs to remodel the current system’s failures and push for a more equal and sustainable economy.
Professor Bidabad, an economics and economic consultant professor, formulated and structured a truly Islamic banking system called the Rastin Banking project. The Rastin Banking Project aims to eliminate interest in borrowing, or Riba, and systematize the Islamic teachings on justice and ethics in banking activities to comply with Islamic principles.
This interest-free banking system is more than just a financial model. This system complies with Islamic principles and regulations and can improve the banking structure by expanding banking, economic, international, financial, social, and ethical activities.
Features of the Alternate System
The Rastin Banking Project has several features that make it an attractive alternative to the existing economic system.
Regulation and Compliance
Firstly, Rastin banks follow specific regulations concerning the activities and finances of proposed projects that conform to their considerations and criteria.
Banks generally finance projects concerning the restoration of uncultivated lands by supporting qualified applicants to promote employment in and development of the agriculture, industry, housing, mining, and tourism sectors in different parts of the country.
Banks and other associations bound by Rastin Banking contracts must abide by the supervisory regulations regarding corporate governance, financial transparency, and information disclosure. In this regard, all warranties and assurances of the bank are considered enforceable official documents, the enforcement of which brings Rastin Banking contracts into effect.
Profit and Loss Sharing
Under the main subsection of Rastin Banking, Rastin Profit and Loss Sharing (PLS) banking, banks fund entrepreneurs who serve as representatives of depositors to invest per regulations. Upon a project’s completion, the division of the profit or loss between the entrepreneur and the depositor(s) depends on the capital and the period of capital use.
The best part is that this system is practical, which we discovered through a study. In this study, we aimed to combine theoretical and practical knowledge to structure Islamic banking operations for the growth and development of Rastin Banking.
Our effort aimed to expand Rastin Banking, a novel solution to banking issues that combines Islamic ethics with science and technology. Some Rastin Banking sections and modules implemented in Bank Melli Iran are now functional and are attracting depositors and investors.
Furthermore, since Rastin banking processes are well defined, the bank staff is efficient, suggesting satisfactory outcomes of the test system. Rastin Banking appears to be a successful nationwide project with several subtle technicalities.
Additional Benefits
Rastin Banking system can be easily installed and employed by banks worldwide as it is an open-source banking model. Thus, Rastin Banking has taken essential steps to establish Islamic banking worldwide and eliminate Riba.
However, a lack of transparency in financial activities can gradually reduce the trust of depositors and stakeholders, resulting in probable damages to all parties with banking contracts.
To this end, Rastin Banking can fulfill unidentified needs, resolve practical problems associated with financial abuse, collusion, and corruption, and positively affect public trust in financial operations.
The Implementation Process
The Rastin Banking system was designed for banks in Iran, and internationalizing this financial method is a strategic and technical affair concerning structures of governmental systems worldwide. Therefore, an analysis of the Mesoeconomics of migration and trade in the interregional and global economy would assist in implementing this financial banking model in Commonwealth nations (Bidabad & Sherafati, 2019).
There are two documents that provide details about the proposed regulations:
- The Bill for Enforcement of the Purports of Binding Banking Documents in Rastin Banking
- The Bylaw for Enforcement of the Purports of Binding Banking Documents and Handling Complaints against Executive Operations in Rastin Banking (Bidabad et al., 2019).
Exploring these documents will give a practical and comprehensive view of the Rastin policies and how the system proposes economic stability and fairness. Each policy takes several financial, economic, and cultural factors into account; hence, reading the two will provide a clear perspective about the overall mechanics of the Rastin Banking System.
Furthermore, policymakers can alter this model based on the requirements of other countries, especially countries with numerous legal disputes and a lengthy and cumbersome dispute-settlement process.
Since the administration of justice is the primary factor that promotes all other economic and social conditions, the Rastin Banking model can help improve society’s social and economic well-being (Bidabad et al., 2019).
Politics and Banking
Political changes are critical for implementing a new financial and banking system in Canada. The relationship between establishing an independent political party and implementing a banking project is meaningful and significant in a country based on the “Disposition (Shakilah) of Society and Ethic Economics.”
Hence, the implementation process will require political and policy changes to succeed. In this case, Professor Bidabad has proposed that the nationwide Rastin Banking project be installed by establishing a new political group in a parliamentary system.
He contends that the move will help implement elective designing procedures in the parliament. The aim is to remove the parliamentary monarchy similar to the Commonwealth nations.
Final Thoughts
Overall, the Rastin Banking system is a viable alternative to Canada’s existing financial banking system. It can positively affect a country’s growth and economic well-being by improving finances and capital markets.
It does away with the interest rate––an essential component of conventional banking––since it is irrelevant in Islamic banks and similar institutions based on partnership, such as mutual funds and savings and loan associations, indicating a completely different approach.
Besides eliminating usury in banking activities, Rastin Banking employs the best ethical financing practices to create a safe environment and regenerate public confidence in banking processes (Bidabad et al., 2019).
References
- Bidabad, B., & Sherafati, M. (2017). Sustainable financing and anti-squandering measures in Rastin banking. International Journal of Law and Management, 59(6), 939–949. https://doi.org/10.1108/IJLMA-04-2016-0037
- Bidabad, B., & Sherafati, M. (2019). Macroeconomics of migration and trade. International Journal of Business and Management Future, 3(1).
- Bidabad, B., Roohollah, M., & Sherafati, M. (2019). Organizational design and rules in Rastin profit and loss sharing banking. International Journal of Small and Medium Enterprises, 2(1).
- Bidabad, B., Abdollahi, S., Sherafati, M., & Mohammadi, R. (2019). Proposed regulations for the enforcement of the purports of binding banking documents in Rastin banking. International Journal of Small and Medium Enterprises, 2(1).